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Stock Market & Market Indices. Types of Markets. Stock E xchanges Trading of stocks listed in an exchange OTC Trading Trading over the counter or outside a stock exchange, in dealer networks ECNs - PowerPoint PPT Presentation

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Stock Market & Market IndicesPowerPoint to accompanyCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st edition1Types of MarketsStock ExchangesTrading of stocks listed in an exchangeOTC TradingTrading over the counter or outside a stock exchange, in dealer networksECNsElectronic Communication Network is an electronic system that allows order execution between exchanges and dealer networks

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionTrading MechanicsTypes of ordersShort sellingBuying on the marginCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionTypes of ordersInstructions from investors to brokersMarket orderbuy/sell order to be executed at best price-- get lowest price for buy order-- get highest price for sell ordermarket orders given priority in tradingno guarantee of execution price

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionTypes of ordersLimit orderbuy/sell order where investor specifies price rangebuy at $50 or lesssell at $52 or moreinvestor sets reservation price but no guarantee that limit order will be executed

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionTypes of ordersStop orderorder lies dormant turns into market order when certain price (the stop) is reachedbuy if price rises to $60sell if price falls to $58investor does not have to watch market but in a volatile market stop could be triggered prematurely

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionTypes of ordersStop limit orderTurns into limit order when stop is reachedbuy if price rises to $60, but only is executed at $65 or lesssell if price falls to $58, but only is executed at $55 or more

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionHow long is an order good?IOC (Immediate or Kill)FOK (Fill or Kill)Day (Only on current day)GTD (Good till Date)GTT (Good till Time)GTC (Good till Cancelled)OPG (participate in Opening Auction only)

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionOrder SizeRound lotslots of 100 sharesOdd lotsless than 100 sharesmore difficult to tradeBlock trades10,000 shares or $200,000 valueCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionShort SellingSale of borrowed stockProfit from belief that stock price is too high and will fall soonborrow stock through brokersell stockbuy and return laterShort selling could further destabilize falling prices

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionShort SellingShort sales allowed ifuptick or zero uptick in price for previous trades:$20, $21 (uptick)$20, $20, $21 (zero uptick)$21, $20 (downtick) Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionBuying on the marginBuyer borrows part of purchase price of stock, using stock as collateralborrow at call money rate/PLRSEC sets initial margin requirementCurrently 50% of stock holdingCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionBuying on the marginIf stock price fallscollateral worth lessif collateral worth only 125% of loan (maintenance margin)-- margin call-- owner must put up more cash or sell stockmargin calls can worsen stock crashCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionBuying on the marginProblem:1000 shares, $20 per share out of which 50% is bought on marginLeveragegains/losses on $20,000 capitalbut tied up only $10,000 capitalIf prices falls to $12 the value of stock is $12,000. This is below 125% of $10,000 loan. Therefore we will get a margin call

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionStock market indicatorsMeasure average performance of a group of stocksThe group of stocks can include the entire market or an entire sector or a selection of stocks based on some criteria

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionStock Exchange indexIncludes all stocks listed on exchangeNYSE CompositeAll stocks listed in the New York Stock ExchangeNasdaq CompositeAll stocks listed in the Nasdaq Stock ExchangeASPIAll stocks listed in the Colombo Stock ExchangeCopyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st editionSubjectively selected indexOrganization picks group of stocks according to various criteriaDow Jones Industrial average30 largest industrial stocks in U.S. that are generally the leaders in their industry.S&P 500500 largest stocks based on market capitalization in the U.S. stock marketS&P SL 2020 largest stocks based on market capitalization in the Colombo Stock Exchange

Copyright 2011 Pearson Australia (a division of Pearson Australia Group Ltd) 9781442502000 / Berk/DeMarzo/Harford / Fundamentals of Corporate Finance / 1st edition

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